Fair PlayREVISTA DE FILOSOFÍA, ÉTICA Y DERECHO DEL DEPORTEwww.upf.edu/revistafairplay

Domestic tax Regimes, foreign athle-tes and benefits of OCED Article 17 for sports contracts.

Zia AkhtarLLB (Lon) LLM (Lon) Gray's Inn Phd candidate (Sussex university)

Citar este artículo como: Zia Akhtar (2020): Domestic tax Regimes, foreign athletes and benefits of OCED Article 17 for sports contracts, Fair Play. Revista de Filosofía, Ética y Derecho del Deporte, vol. 16, p. 39-57.

FECHA DE RECEPCIÓN: 19 de Diciembre de 2019 FECHA DE ACEPTACIÓN: 9 de Febrero 2020

Domestic tax Regimes, foreign athletes and benefits of OCED Article 17 for sports con-tracts.

Zia Akhtar LLB (Lon) LLM (Lon) Gray's Inn Phd candidate (Sussex university)

Abstract

In the UK the resident athlete is subject to British taxes on any income and capital gains on their worldwide earnings generated in the tax year, irrespective of where in the world the income or gains arose. The UK tax system is based on the principles of “residence” and “source” which means that if someone is a “resident” in the UK then they are subject to income tax rates in the country; however for non British residents the national taxation will apply if they have a “sour-ce” of income that is generated within the UK, and which does not draw the relief under the dou-ble tax treaty. This means for sportspeople who compete internationally even if they do not live in the UK their revenue will require tax planning and structuring, and the evaluation of the inco-me and outgoings from participation in events. There is much scope for creative structures after the implementation of the Organisation of Economic Cooperation and Development (OECD) Ar-ticle 17(2), that allows the Double Treaty Taxation in the field of sport. The argument that this is a provision that offers a fairer option for foreign athletes who are participating in sports events in the UK.

Key words:

APA, HMRC guidelines, “Residence”, “Source”, Territoriality, OECD Article 17 (1), Double treaty taxation, Image rights.

1. Introduction

The scope of taxation regimes for highly paid athletes has to be considered in an in-ternational framework because sport is a global industry. The income of sports people is based on the remuneration and sponsorship from corporations that can be earned from advertising in countries where the athletes themselves are non-resident. There is a need to review the overall structure of taxation regimes for athletes and whether it is delivering policy objectives., whether these objectives are sound and whether there are others that should be considered.

There is an ever increasing proportion of sportsperson’s income that derives not just from participation and awards but also from endorsement contracts, sponsorship and merchandising emanating from their image rights. The contractual arrangements for the provision of creative

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services may often mitigate the heavy burden of foreign taxation, and provide opportunities for domestic tax planning. The burden of direct taxation on sportspersons is complimented by indi1 -rect taxes such as value added tax and social security payments that is not a major factor for con-sideration. The residence in a particular country due to the period of time in which the sports-man is present needs consideration together with double tax relief considerations where relevant. There is also the tax treatment of other members of the entourage surrounding sportsmen since the income generated by such individuals can be considerable and needs dispensation to the ret-inue who are back up such as coaching staff or project managers.

The double tax treaties that enable tax relief are in accordance with the model OECD treaty which has introduced the Article 17 (1) which formulates the period when tax relief applies. This provision states that “income derived by a resident of one state as an entertainer (such as a the-atre, motion picture, radio or television artiste, or a musician), or as a sportsman (which in-cludes, for example footballers, golfers, jockeys, cricketers, tennis players, racing car drivers) as well as any participant in public entertainment (such as snooker, chess or bridge players), from his personal activities may be taxed in the other state. This is important to understand in relation to income from non-performing activities contracted by the sportspeople by means of endorse-ment and merchandising agreements. 2

Article 17 (2) also extends the right of the local tax administration not only to income paid direct to the above individuals, but also to tax such income even if it is received by companies or owned and controlled by individuals. However, notwithstanding this provision the use of loan out companies still has considerable relevance in structuring the international sports. There may, for example, be concessions which apply to employees that are not self employed individuals involved in a competition but in a team sport. This extends the right of the local tax administra-tion not only to tax income paid direct to the above individuals, but also to tax such income even if it is received by companies or indeed any other entity.

This paper considers the various permutations of tax arrangements that are written into the contractual frameworks involving sportspeople. It will take into account the UK tax rules ac-cording to the residence and source which have benefits and liabilities for the individual con-cerned. The question arises if athletes are judged differently if they are Resident in another coun-try and their source of income is drawn in the UK jurisdiction. The resident for sporting events means not being in permanent resident or being domiciled and just present for sporting events

Royalty payments are often exempt from withholding tax, as they are under the OECD Model Treaty Arti1 -cle 12.

Roy Saunders, Understanding Double Tax Treaties, Journal of International Trust and Corporate Plan2 -ning, Vol 9, Issue 1 (2003) page 6 https://www.itpa.org/wp-content/uploads/2016/02/saundersunder.rtf

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but non-resident. This argument is for framework of OCED Article 17 to generally adopted in treating sports persons more equitably.

2. Employment contracts and special allowances

The funding agreements for athletes need examination in order to determine their implica-tions about their employment status and tax liability. The UK Sport is the governing body for sports in the country and has the responsibility for providing resources for the sporting bodies. 3

They provide funding for National Governing Bodies (“NGBs”), enabling them to facilitate World Class Performance Programmes (“WCPPs”) for their respective sports. The athletes who are selected to participate in a WCPP course will enter into a Performance Athlete Agreement (“PAA”) with their NGB (or other properly designated funding body). 4

The PAA contract requires the athlete to comply with a number of obligations laid down by the NGB, relating to abiding an Individual Performance Plan (“IPP”); compliance with specified standards of behaviour and attitude; compliance with betting and doping regulations; and gran-ting rights to the NGB in relation to use of the Athlete’s image rights. In return, the Athlete is en-titled to receive a “package of support and benefits” from the NGB including the training, com-petition and personal development planning and review. The “general benefits” available to an 5

athlete will ordinarily comprise the coaching support (from a person with appropriate qualifica-tions); team clothing and equipment; sports science support; medical services; lifestyle manage-ment and personal development support; travel and accommodation expenses at designated camps and events; WCP information and advice; BOA/BPA passport scheme for UK citizens; high standard kit, equipment and performance clothing; and insurance cover. 6

There is a requirement from the PAA for an athlete who has been selected to participate in a WCPP to enter into agreement with UK Sport, which then sets out the terms and conditions ap-plicable to the grant of an Athlete Performance Award (“APA”). This is a direct payment made to the athlete as a contribution towards their ordinary living and personal sporting costs and is sole-ly funded by National Lottery income. The level of an APA grant is determined by a number of 7

UK Sport homepage, https://www.uksport.gov.uk/3

UK Sport, “How UK Sport funding works”, uksport.gov.uk, last viewed 10 December 2018 2016,https://4

www.uksport.gov.uk/our-work/investing-in-sport/how-uk-sport-funding-works

UK Athletics. Athletics Contracts for athletics included in the World Class Programme. 2006file:///C:/5

Documents%20and%20Settings/user1/My%20Documents/Downloads/Athlete%20Contract.pdf

World Class Performance programmes.’ Sample Athletes agreement. file:///C:/6

Documents%20and%20Settings/user1/My%20Documents/Downloads/UKA%20Athlete%20Agree-ment%202009-10.pdf

The guidance from HMRC states, “The APA is voluntary grant given for nothing in return” (see page 7

1019A-1019C).

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criteria, with a focus on the athlete’s sporting achievements and potential. This is an accelerated payment paid to the athlete that is governed by the Finance Act 2014, Chapter 4. 8

The APAs are allocated where there is the greatest ‘financial need’ and are subject to a means testing exercise. UK Sport has set a maximum income threshold of £65,000 (including their APA) above which an athlete's APA will begin to be deducted pound for pound. While there are variances depending on the sport, two performance categories apply for ‘Podium’ level ath-letes: Band A – Medallists at Olympic Games or Senior World Championships or gold medallists at Paraolympic Games or Senior World Championships. The value of this is up to £28,000 pa and Band B – a minimum of a top 8 finish at Olympic Games or Senior World Championships or medallists at Paralympic Games or Senior World Championships has a ceiling of up to £21,500 pa. 9

The funding is awarded on the basis of an Olympic cycle and commences on 1 April (or 1 October for Winter Sports) in the year immediately following an Olympic Games and is effective for a period of four years. The funding provided to athletes under APAs is reviewed each year as part of an Annual Investment Review process. The APA agreement includes similar provisions to those contained in the PAA regarding the athlete’s duties and responsibilities, and both the PAA and the APA agreement contain express clauses addressing the issue of employment status.

Both the PAA and APA agreements comprise express clauses delineating the sportspeople as self employed athletes: “We both…acknowledge that this Agreement is not a contract of em-ployment”; “You acknowledge and agree that…becoming a member of the WCP will not create an employment relationship between us”; and “You acknowledge and agree that…you are solely responsible for managing Your personal financial and tax affairs, including the payment of any tax which might arise on any payments or provision of services or benefits made available to you by Us and in connection with this Agreement.” 10

The definition of employee status is a matter for employment tribunals and courts to de-termine, based on an assessment of the “reality” of the parties’ relationship, and the designation of that relationship by the parties that will not necessarily present the real circumstances. The

Finance Act 2014 section 223 governs the effect of notice given while tax enquiry is in progress[F1: ac8 -celerated payment]

[F2(1)This section applies where—

(a)an accelerated payment notice is given by virtue of section 219(2)(a) (notice given while a tax enquiry is in progress) (and not withdrawn), and

(b)an amount is stated in the notice in accordance with section 220(2)(b).]

(2)P must make a payment (“the accelerated payment”) to HMRC of [F3that amount].

(3)The accelerated payment is to be treated as a payment on account of the understated tax (see section 220).

www.uksport.gov.uk/our-work.investing-in-sport/how-uk-sport-funding-works9

World Class Performance programmes.’ Sample Athletes agreement, Ibid10

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scope of an employment relationship that impacts on taxation of athletes was decided in UK case law when for interpreting contracts in sports agreements involving athletes.

In Autoclenz v Belcher where Mr Belcher and 19 other individuals provided car-valeting 11

services for Autoclenz Ltd. Their contracts referred to them as sub-contractors, and included a “substitution clause”, purportedly meaning that they were not required to carry out the work per-sonally. The contracts also stated that the company was not obliged to provide work to the indi-viduals, and that they were not required to do any work offered. The individuals brought claims asserting that they were workers and entitled to statutory paid leave and the national minimum wage. The employment tribunal and Employment Appeal Tribunal both found that the claimants were employees and/or workers for the purposes of their claims. The Court of Appeal agreed, stating that the tribunal’s decision that the claimants were employees “in all but name” was a “perfectly tenable one” and “the elaborate protestations in the contractual documents that the men were self-employed were odd in themselves and, when examined, bore no practical relation to the reality of the relationship”. 12

The Supreme Court upheld this decision and affirmed the correct test in Consistent Group Ltd v Kalwak and others [2007] IRLR 560 EAT which dealt with the key question to determine the “true agreement between the parties”. The Court of Appeal’s approach in Consistent Group 13

Ltd v Kalwak and others [2008] IRLR 505 CA was deemed it to be "too narrow" to an employ-ment relationship, where individuals’ terms are often dictated by the organisation to whom they provide work for remuneration. The Court stated that, in an employment context, the “relative bargaining power of the parties must be taken into account in deciding whether or not the terms of any written agreement truly represent what was agreed. The true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part”. 14

The employment tribunal had been entitled to disregard the terms of the claimants’ written contracts, insofar, as they were inconsistent with the true terms of the contracts. It upheld the finding that the claimants were workers for the purposes of their claims, and dismissed the com-pany’s appeal. Although the Court declared that, where a party asserts that a written term does not reflect the reality of the agreement, the tribunals and courts may consider the context of the contract to determine the true nature of the agreement. The impact of the decision in employment contract that include terms and conditions that do not reflect the ‘reality’ of the agreement with a worker or employee and the tribunal or court can disregard these in any relevant proceedings. There is a recent decision of how the self employed status of sports people will impact on employment law for taxation purposes.

[2011] UKSC 1111

Smith LJ at 2712

At 17 13

At Parah 35 14

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In Ms J Varnish v British Cycling Federation t/a British Cycling (1) and United Kingdom Sports Council t/a UK Sport (2) the Employment Appeal Tribunal (EAT) considered the appeal 15

of the claimant based on the termination and non renewal of her Podium Performance Agreement as a professional cyclist with the GB Cycling Team. She brought a claims of unfair dismissal pursuant to section 98 Employment Rights Act 1996, direct sex discrimination pursuant to sec-tion 13 Equality Act 2010 and victimisation pursuant to section 27 of the Equality Act 2010, and unlawful detriment for having made protected disclosures pursuant to section 47B Employment Rights Act 1996.

The EAT held that under Clauses 6.25 and 6.26 of the Athlete Agreement that dealt with tax the “ British Cycling Federation have not made any deduction for income tax or national in-surance from any amounts paid or any services benefits or other support made available to the claimant under the Athlete Agreement”. Furthermore, the claimant was responsible for her 16

own tax and financial affairs as Clause 2.2.5 in the agreement stated “You are solely responsible for managing your personal financial and tax affairs, including the payment of any tax which might arise on any payments or provision of services benefits and other support available to you by us under and in connection with this agreement”. This provision was not consistent with em-ployee status and the claim failed the test in the Employment Rights Act 1996 section 47 B. 17

The relationship between the claimant and UK Sport was essentially the “ provision of a tax free grant to cover for living expenses in order to allow her to focus on training as an athlete and maximise her chances of competing in international competitions and winning medals”. 18

The grant received in the form of the APA was from “UK Sport, a publicly funded body, to help with her living and sporting expenses whilst she was training. There were no restrictions in place relating to work or employment on athletes by UK Sport save for a means test”. This meant 19

that the claim against the second respondent also failed based on the Equality Act 2010 section 82 (3). This decision will impact on the athletes who are paid by their funding bodies by affirm-ing their designation and while there has not been any successful challenge to the ‘non-employ-ment’ characterisation of the relationship that exists between athletes and their NGBs , the case law shows that it can be invoked in the courts. 20

EAT Case no 2404219/2017 (2018)15

Parah 12416

Parah 23117

Parah 29118

Parah 29519

It should be noted that there are differences between the definition of “worker” in section 230 (3) of the 20

Employment Rights Act 1996 and the extended definition of “employment” in section 83 (2) (a) of the Equality Act 2010. There will often be considerable scope for discussion as to how a particular labour relationship should be categorised and the statutory protections that is afforded to sportspeople in their particular circumstances.

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The UK Supreme Court on the liability for taxation of athletes in the UK has established principles applicable in the UK in breach of contract and voiding tax liability. In Formerly the Rangers Football Club (RFC)PLC v Advocate General for Scotland from an appeal of the 21

Scottish Court of Session on an error of law. It considered that payments of “earnings”, for the purposes of the ICTA 1988 and the Income Tax (Earnings and Pensions) Act 2003 that had been made by the football club who were appellants to evaluate if they were payments to constitute earnings for PAYE and NIC purposes. This has to be determined whether it was sufficient that 22

the payment was “derived from” work done by a particular employee and/or it “formed part of the employee’s employment package” and if the powers which each employee held as protector of a sub-trust had the effect that the funds in that sub-trust were unreservedly at the disposal of the employee and were earnings for tax purposes.

The recruitment of a footballer at the RFC required the terms of his engagement to be recorded in two separate contractual documents. The first was a contract of employment which set out the terms of employment and the footballer’s remuneration which would be paid subject to deduction of PAYE and NICs. The second was a side-letter in which a senior executive of RFC undertook that RFC would (a) recommend to the trustee of the Principal Trust (i) to include the footballer as protector of a sub-trust and (ii) to fund the sub-trust with the sum or sums which had been agreed in the recruitment negotiation, and (b) fund the Principal Trust to enable the trustee to carry out those recommendations. 23

The Supreme Court unanimously dismissed the appeal holding that the sums paid to the trustee of the principal trust for a footballer constituted the footballer’s earnings, and the “risk that the trustee might not set up a sub-trust or give a loan of the sub-trust funds to the footballer does not alter the nature of the payments made to the trustee of the principal trust. As such, as the sums paid into the principal trust were earnings in the first place, the specific provisions of the tax code which deem the benefit of loans to be earnings cannot apply”. 24

There needs to be a distinction drawn between: (a) the direct funding and (b) the provi-sion of support and benefits to athletes in connection with their training and competition activi-ties etc. The OECD's suggested criterion for employment status includes the principles "that the payer bears the responsibility or risk of the results produced by the employee's work; the payer has the authority to instruct the worker in his duties; the payments made by the payer to the apparent or contractual employer is calculated on the basis of the time used, or there is in some

(2017) UKSC 4521

“Earnings” is broadly defined in s.62 of the Income Tax (Earnings and Pensions) Act 2003 as (a) any 22

salary, wages or fee; (b) any gratuity or other profit or incidental benefit of any kind obtained by the em-ployee if it is money or money’s worth; or (c) anything else that constitutes emolument of the employ-ment.

Para 2223

Para 6924

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other way a connection between the fee paid by the payer and the wages received by the em-ployee; and tools and materials are essentially put at the employee's disposal by the payer". 25

The number and qualifications of the employee is not the sole determinant of the ap-parent employer in the liability for taxation. The English footballer playing in the Premier League will be employed by their club and paid an annual salary for representing the club which and will be taxed in the UK at the appropriate marginal rate of income tax for the individual (up to 45%), with National Insurance being payable in addition. The foreign soccer players who play in the Premier League can be designated as non-domestics resident for UK tax purposes. Each of these players would be paid directly by their employer, the respective Premier League club, and full UK tax would be due on that salary. However, if those players earned monies from sources (or activities) outside of the UK, then they could legitimately avoid paying UK taxes by electing for the “remittance basis” rules to apply. 26

3. Visiting athletes and tax implications Many international athletes will perform in the UK but will not usually spend sufficient

time in the country to be considered British tax resident. Their itinerary will consist of visiting to participate in certain events, which could range from annual events such as the Wimbledon Ten-nis Championships, or various athletics meetings or golf tournaments throughout the year, or specially awarded event such as an Olympic Games or European Football championships. Most of these individuals will spend fewer than 46 days in the UK during a given tax year and conse-quentially would be considered to be tax resident outside the UK. However, the UK's “source 27

basis" of taxation will still apply to these individuals and, consequently, foreign athletes appear-

Model Tax Convention on Income and on Capital https://www.oecd.org/tax/treaties/model-tax-conven25 -tion-on-income-and-on-capital-2017-full-version-g2g972ee-en.htm

Non –Dom (Non domiciled Tax for Residents in the UK) 10 January 2019 https://www.expertsforex26 -pats.com/expat-tax/non-dom-non-domiciled-tax-in-the-uk/

Finance Act 2013, Schedule 45, Part 1, s13 27

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ing in the UK can still incur significant tax liabilities even though they are not resident. If an 28

athlete lives in the UK and another country and both countries tax his income, then he is a dual resident. He can claim full and partial relief on UK tax on his UK income if the 2 countries who have a double taxation agreement (DTA) allow him to do so. 29

The UK tax legislation imposes an income tax charge on foreign sportsmen if their in30 -come relates to a "relevant activity" performed in the UK which for an athlete primarily will in-clude participating in a sporting event and any earnings that relate to such participation will be taxable in the UK. Many double tax treaties give the taxing rights for such income to the country of source. However, the UK tax legislation defines a relevant activity for non-resident sportsmen

as being wider than simple appearance fees, performance fees and prize money. The defini31 32 -tion includes promotional, endorsement and sponsorship activities carried out as part of the sporting performance, which may not normally be considered to be from a UK source. Conse33 -quently, athletes can be subject to UK tax on a proportion of their general endorsement and spon-sorship income as well as their prize winnings.

There are examples such as tennis competitors who come to play at Wimbledon and the other overseas tournaments. The winner would be required to pay UK income tax on their prize money from Wimbledon and any appearance fees he was paid whilst he was in the UK. They would also be required to pay tax on a proportion of their overall sponsorship and endorsement income during the year to the extent that it related to an individual player in general, rather than being sponsorship for a specific (non-UK) tournament. The HMRC guidance states that an ac-ceptable proportion of player’s sponsorship and endorsements income would be 1/10th, being the number of UK performance days as a fraction of the total performance days in the year. 34

The Inland Revenue's Double Taxation Relief Manual and Inspector's Manual both at include some 28

very useful comments on the term 'on behalf of'. The following is an extract: 'Payments may be made on behalf of a non-resident employer in cases where the payment is physically made by a United Kingdom company [without loss of the 183 day rule relief, so long as] … that non-resi-dent ultimately bears the cost of such remuneration and benefits. Claims should not be admitted where a United Kingdom company pays the remuneration or incurs the cost of benefits and does not receive reim-bursement from the overseas employer.' (paragraph 1922)

Dual Residents : HS302 Self Assessment help sheet 6/4/19 https://www.gov.uk/government/publica29 -tions/dual-residents-hs302-self-assessment-helpsheet

Income Tax (Trading and Other Income) Act 2005, s13 and s14.30

The Income Tax (Entertainers and Sportsmen) Regulations 1987 (the “Regulations”)31

The territorial principle is particularly relevant in the UK because of the relatively broad-ranging tax 32

rules applicable for foreign resident sportspeople . Dick Molenaar, Taxation of International Performing Artistes: The Problems with Article 17 (2006) 16

Ibid, as defined by Regulation 6 (3) (a) and (b) of the Regulations.33

HMRC, ‘BIM50606 - Athletes: Tax treatment of income: case studies,’ HMRC.gov.uk, last viewed on 34

15 April 2016 https://www.hmrc.gov.uk/manuals/bimmanual/BIM50606.htm

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The example can be provided of Wimbledon 2018 where a total prize money of £28.1m 35

was on offer, with the sum of £2.25 m paid to the winner of both the men’s and women’s singles titles and “second round losers” in both draws receiving £50,000. Therefore, even if an individ-ual loses in the second round, they were still earning enough in the UK from that performance alone to be considered a “40% taxpayer”. The proportion of any worldwide sponsorship and 36

endorsement income could also become liable to a UK tax charge of at least 40%.

The athlete may also be subject to income tax in the country where they live. In some cas-es, the athlete’s country of residence may have a Double Tax Treaty with the UK, allowing the athlete to reduce any local taxes by the amount of UK tax paid. However, if there is no Double Tax Treaty between the UK and their home country, the athlete may then incur double taxation on the income. The winners of the Gentlemen’s Doubles title at Wimbledon after receiving their prize money would each be liable to pay UK income tax on that amount at a rate of up to 45%. The overseas athlete who would be a tax resident of their country will also be subject to the in-come tax in that jurisdiction, however, in the absence of any Double Tax Treaty will be unable to reduce his national tax to account for the tax already paid in the UK. Therefore, unless the do-mestic law provides unilateral relief then the athlete could be paying tax in two countries, effec-tively suffering “double taxation” on the same income.

In Agassi v Inland Revenue the issue of a foreign based player who had temporary resi37 -dence in the UK could avoid paying taxation for endorsement earnings from Nike and Head sports merchandising companies which were not registered in the UK. The Inland Revenue (IR) had charged Agassi £ 27,520.40 in tax which he refused to pay invoking the territoriality princi-ple. He sought exemption under the Income and Corporation Taxes Act (ICTA) 1988 Section 38

555 (2)and 556. His claim was not accepted at the High Court where the ruling stated that Par-liament had a clear intent to tax Agassi’s endorsement income. The Court of Appeal over39 40 -turned the decision and addressed the issue under the territoriality principle and as a matter of “statutory construction” and the rule in interpreting taxing statutes where the tax liability ought to be avoided under statute has to contain “clear words”. 41

https://www.wimbledon.com/en_GB/atoz/prize_money_and_finance.html.35

Finance (No. 2) Bill 2016, s1 and s2. 36

(2006)UKHL 23 37

This was pleaded successfully in Clark v. Oceanic Contractors Inc., [1983] 2 A.C. 130 (H.L.) (Lord 38

Wilberforce). The territoriality principle was applied to income tax in Colquhoun v. Brooks. See Agassi, [2004] EWHC 487, at 12 (citing Clark v. Oceanic Contractors (1983) 2 A.C. 130 (H.L.) (quoting Colquhoun v. Brooks, (1889) 14 App. Cas. 493, 504)). .

at 16 39

(2004) EWCA (Civ) 151840

At 14 ((citing Ramsey v IRC (1982)AC 577 Lord Wilberforce at 57741

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The House of Lords reversed this judgment and held that the IR was empowered to collect tax under ICTA s 555 and s 556. Lord Foscote ruled that the burden of taxation did not apply as the Aggasi did not maintain his presence in the UK and taxation will be a voluntary. However, s 556 could only be avoided through s 556 (5) if the payment is not of the prescribed type regard-less of payer’s identity. This is because the taxation of sportsmen could be avoided based on the fact that neither party maintained a tax presence in the UK, and the tax would be essentially voluntary; re-gardless of the tax payer‘s identity; and also, because the purpose of sections 555–558 was to tax the in-come earned by non-resident athletes for their UK performances.

4. Variables for non resident athletes

The Double Tax Treaty is in place when an overseas athlete wins an event such as the Golf Open in 2018 upon which they will earn prize money of £1.42m. The golfer will be liable to 42

pay UK income tax on that amount at marginal rates of up to 45%. There are other additional complications for non-resident athletes to adhere to, which include certain payment and filing requirements in accordance with the UK’s compliance legislation. This can require non-UK resi-dent athletes to file annual tax returns and the deduction of an estimated UK tax liability; howev-er an alternative for the non-UK resident athlete would be to apply to HMRC for an “advanced clearance” to obtain their advanced agreement on the athlete’s tax position.

The athletes will need to have tax advisers in multiple jurisdictions to ensure that their af-fairs are managed correctly and their tax exposure is effectively minimised. This is especially relevant in the context of the recent Brexit vote, which could result in athletes losing the EU freedom of movement protection when competing in the UK. If the UK no longer needs to ad-here to the EU freedoms, it would be free to apply potentially restricting tax rules on EU based athletes competing in the UK.

The claims by HMRC on earnings of sportspeople on endorsements following Agassi case are very wide and out of step with the approach of other countries. The need exists to introduce special exemptions for individual athletes like Usain Bolt who have refused to compete in the UK if a proportion of their worldwide earnings then become subject to tax. Bolt has ran a total of 14 days a year, one of which was in the UK and HMRC deducted 1/14th of his total earnings in-cluding on global sponsorship and endorsement earnings as well as any appearance fee - levied at the 50pc higher earning rate. The specific exemption granted for not using this form of taxa-tion was for the Olympic Games in 2012 when Bolt did compete in the event winning the 100, 200 and 100 relay gold medals.

Karolina Teflak argues that the exemptions granted by the UK for major international sporting events are specifically targeted and apply only to particular events referred to in the tax measures. The problem identified is that “inconsistent tax policy concerning athletes’ participa-tion in events held across the country and incidentally issued regulations raise questions in light of the principles of equality and fair taxation. Such an approach can also result in pressure from

Elliott Heath, “Open Championship Prize money Announced”, Golf Monthly, published 6 July 2016, 42

viewed on 6 July 2016, https://www.golf-monthly.co.uk/news/tour-news/open-championship-prize-mon-ey-announced-104264

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other athletes and organizations requesting similar tax preferences. While the introduction of a tax break is meant to increase the country’s attractiveness as a candidate to organize a specific event, it seems inappropriate that the exemptions only cover football players taking part in one sporting event and omit the participants in other tournaments such as Wimbledon or the British Open Golf Championship. Offering one-off tax exemptions is a move that encourages the best athletes to compete in the UK but it makes top athletes call for an exemption for their UK events”.

Teflak observes that assuming that the overall expenditure to the Inland Revenue of the overall “tax breaks to the Treasury is estimated at £1.5 million a year, the government could ex-tend the relief to the wider international sport arena”. This will enable a more coherent tax poli-cy that will allow the UK it to “bid for major championships” and it could be made on a case only basis whenever a famous sportsman makes “public concerns about not competing in the UK because they view the UK tax regime as restrictive”. 43

The OECD Model Double Tax Treaty Article 17 (2) provides that athletes shall only be taxed in a foreign country if they have a fixed base regularly available to them for the purposes of performing their activities, referred to as a permanent establishment for fiscal purposes.

Parah 12 of the explanatory commentary states:

“ Where, in the cases dealt with in paragraphs 1 and 2, the exemption method for relieving double taxation is used by the State of residence of the person receiving the income, that State would be preclud-ed from taxing such income even if the State where the activities were performed could not make use of its right to tax. It is therefore understood that the credit method should be used in such cases. The same re-sult could be achieved by stipulating a subsidiary right to tax for the State of residence of the person re-ceiving the income, if the State where the activities are performed cannot make use of the right conferred on it by paragraphs 1 and 2. Contracting States are free to choose any of these methods in order to ensure that the income does not escape taxation”. 44

The employees are only taxed if they are present in the other country for more than 183 days in a 12 month period and such individuals would, as a result of their fixed base or their length of stay, be benefiting from state financed services in the other country, and there is there-fore a logic for such taxation. Article 15 contains the 183-day rule regarding the income from em45 -ployment and this states that the 2 important conditions which are (i) Subject to the provisions of Arti-cles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a con-tracting state in respect of an employment shall be taxable only in that state unless the employ-ment is exercised in the other contracting state. If the employment is so exercised, such remune-

Karolina Teflak, Comments on selected 2014 updates on art. 17 of the OECD Model Tax Convention. 43

Global Sports Law and Taxation Reports 2014 (March) Vol 6, No 1

Issues related to Article 17 of the Model Tax Convention, Adopted by the OECD Committee on Fiscal 44

Affairs on 26 June 2014.

https://www.oecd.org/tax/treaties/report-article%2017-model-tax-convention.pdf

Article 15 contains the 183-day rule is followed almost verbatim by virtually all major tax treaties. 45

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ration as is derived there from may be taxed in that other state; (ii) Notwithstanding the provi-sions of paragraph 1, remuneration derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first-mentioned state if '(a) the recipient is present in the other state for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the fiscal year concerned, and '(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the ot-her state, and '(c) the remuneration is not borne by a permanent establishment which the emplo-yer has in the other state. This condition is used only to require that the individual was not in the fo-reign country for 183 days during that country's tax year. The third condition for exemption is that remu-neration of the employee must not be borne by a permanent establishment or fixed base which the emplo-yer has in the foreign country. The subsidiary company is not generally a permanent establishment of its overseas parent company. 46

Most states in the world implement Article 17 of the OECD Model Tax Convention which withholds tax on the performance fees of non-resident artistes and sportsmen, even if they are self-employed. This is to avoid double taxation agreements in the payment of tax liability in two jurisdictions. Article 17 has been taken over in the UN Model Tax Convention not only the 47

OECD Member States but also many other states which incorporate this form of text both in their tax treaties and in their national legislation. Their fees are deemed to be business income and 48

they do not have an impact on the state of performance. There is acceptance that this taxation at source deviating from Article 7 (business income) and Article 15 (employment income) is a rea-sonable measure to ensure that every artiste and sportsperson pays their share of earnings to the government.

The UK has advanced towards a substance-over-form approach regarding some taxes such as for those regarding financial instruments. The OECD Model highlights the underlying prin49 -ciples of the given recommendations, especially with respect to interest income and capital gains. The high potential for tax avoidance with formalistic approaches may have contributed to the

In the United Kingdom, the Revenue specifically confirms this fact at paragraph 1923 of its Double 46

Taxation Relief Manual.

See Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Re47 -spect to Taxes on Income and on Capital Gains, with Exchange of Notes, U.K.-U.S., July 24, 2001, T.I.A.S. 13161, 2224 U.N.T.S. 247

Section 89 of the 1987 OECD Report; also Dick Molenaar and Harald Grams, ‘Rent-A-Star: The Pur48 -pose of Art. 17(2) of the OECD Model’, Bulletin for International Fiscal Documentation 56 (2002): 10.

Antti Laukkanen, Taxation of Investment Derivatives, (2007 ) 144 49

.

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transformation with the principal focus on three universal tax issues, namely valuation, timing and the taxation of unrealized gains. 50

The lack of a strong substance-over-form tradition in taxing statutes might have encour-aged the courts to rule that ICTA Section 555(2) imposed a burden on non-resident corporations to withhold tax. In the absence of such a finding, a tax could be levied through a non-resident company rendering taxes determined by the taxpayer‘s residence voluntary. The application of the substance-over-form approach tax could still be evaluated if the registration of the payment was determined to be a purely formal transaction to shield the nature of the payment by a com-pany with a UK tax-presence. It is unclear whether the purpose Sections 555–558 independently justifies imposition of income tax on a non-resident sportsperson‘s endorsements. This is be-cause the taxing statute‘s legislative purpose is component in the substance-over-form taxation doctrine. The focus of the courts on legislative intent is an additional signal that the substance-51

over-form taxation doctrine has been accepted in the U.K. 52

The case-law of the common law countries reveals that when assessing the validity of a transaction and its effects by the substance over form doctrine and this considers the economical reasons of the transaction. Thus, the substance over form doctrine allows the tax authorities to examine the legal form of the transaction to establish its underlying economic reality This prin53 -ciple has been incorporated into the framework of Article 17 of OECD and requires defining the uniform system of sportspersons income computation under these principles. Without this the aims of international treaties and agreements with respect to establishing a coherent tax regime for non resident artists and athletes are unattainable. The initial evaluation is based on the con54 -cept of the scope of a performer‘s income within the meaning of the Article 17.

Ibid, . (―[T]ax avoidance opportunities are easier to abolish with substance over form than form 50

over substance, as financial engineers may otherwise easily take advantage of inflexible formal law interpretations. . . .).

J. Bruce Donaldson, When Substance-over-Form Argument is Available to the Taxpayer, 48 MARQ. L. 51

REV. 41, 41 (1964) (―[T]he doctrine of substance-over-form . . . is a search for the essential reality, see-king to uncover the economic substance in order to allow the tax burden to fall with the exact weight which Congress intended.ǁ).

In Ramsay Ltd. v Inland Revenue Commissioners [1982] A.C. 300 the House of Lords denied the tax52 -payer’s deduction of an alleged capital loss resulting from a series of circular and self-cancelling transac-tions with the purpose of tax avoidance. This principle involves treating steps having no commercial pur-pose inserted in a composite transaction or series of transactions as a ‘fiscal nullity’ and disregarding them for tax purposes.

C. A. Alvarrenga ‘Preventing Tax Avoidance: Is There Convergence in the Way Countries Counter Tax 53

Avoidance?’ Bulletin for International Taxation, 2013 (Volume 67), No. 7, p. 352

Dick Molenaar, Taxation of International Performing Artistes: The Problems with Article 17 (2006) 54

supra 45 at 53

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Simpson argues that the “ performer‘s income is generally divisible into three categories: compensation for the performance, sponsors‘ compensation directly related to a performance, and sponsors compensation indirectly related to a performance. The compensation for a

specific performance should always be taxable in the country the performance takes place in. The sponsorship income directly related to a performance might be from a company with a tax presence in the country of performance or from a company without such a tax presence. If the sponsoring company has a tax presence in the performance country, it is logical to allow that country to levy a full income tax on that sponsorship amount. When the sponsoring company lacks a tax presence in the performance country, the solution in assigning a country the income tax from a performance is to achieve parity for performances with what would be expected if the same amount of income was given as compensation for services in the country. While assignment to multiple countries might be theoretically appealing because multiple nations can receive in-come—as opposed to an all or nothing rule—such a system might be administratively not achievable”. 55

“ The only other country who might claim the tax is the performer‘s nation of residence. The nexus between the performer‘s sponsorship income and the performer‘s na-

tion of residence is attenuated. The core of the transaction results from the performer‘s talents and

the performance country‘s resources. not so clear. The resident country of the performer and

company may also assert a claim to the income tax. Assignment of the income tax to the country of performance still makes sense, however, because the performer and compa-

ny are availing themselves of the performance country‘s benefits by entering into a sponsorship agreement directly related to a performance in that country. 56

This implies that the indirect income of sportspeople raises more problems and if a per-former‘s sponsorship income is the result of previous performances then it is difficult to set a limit on the computation. The definition of the indirect income might be over valued if the cost of the sponsorship with no performances is estimated to be high.

In Hull City Tigers v HMRC a UK First Tier Tribunal (FTT) considered the promotion to 57

the Premier League for the first time in its history, Hull City signed8 former Brazilian in-ternational, Geovanni, in July 2008 on a free transfer, following his release by his previous club Manchester City at the end of the 2007/08 season. After four months Hull entered into a separate

Alan Simpson, Taxation of Non-Resident Entertainers and Sportsmen: The United Kingdom's Defini55 -tion of Performance Income and How it Ought to be Measured, 11 Wash. U. Global Stud. L. Rev. 693 (2012), http://openscholarship.wustl.edu/law_globalstudies/vol11/iss3/5 p 709

Ibid p 70156

[2019] UKFTT 022757

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“Image Rights Agreement” in respect of Geovanni’s overseas image rights with Joniere Ltd, a service company registered in the BVI. In the period December 2008 to July 2010, Hull paid Joniere a total of £440,800, purportedly under the terms of two such “image rights” agreements.

The HMRC initiated an image rights investigation in June 2011 into liabilities of the Hull FC. In circumstances in which Geovanni was no longer UK resident or domiciled, and had by then resumed his contract with a club in Brazil, no enquiry was opened into his individual tax affairs. However, H MRC issued Regulation 80 Determinations9 against Hull in relation to un58 -paid PAYE and Section 8 Decisions in relation to unpaid NICs10 . These amounted to £250,000 59

in unpaid income tax and NI contributions.

The argument of Hull FC at the hearing was that the Image Rights Agreements were valid agreements which required payments to be made on ground of image rights and not as earnings. The HMRC stated that the payments represented earnings of Geovanni and not payments for im-age rights and they were liable to pay tax and national insurance contributions in respect in ac-cordance with the Part 2 of the Income Tax (Employment and Pensions) Act 2003.

The FTT accepted the HMRC’s contention that they were earnings and that “Whilst it is not just players in the ‘elite group of recognisable sportspeople’ who have image rights with an overseas commercial value, what makes a player sufficiently recognisable for their image rights to be valuable will include: their talent; the league in which they play; the team for which they play and possibly other personal attributes (such as their nationality) Further, the “ Clubs who 60

intend to acquire and exploit players’ image rights would be well advised to keep negotiation of that agreement separate to the salary negotiation and to ensure that the valuation of image rights is documented by reference to a business case for the initial acquisition, together with analysis monitoring the effectiveness of the exploitation of the rights over the period of the agreement”. 61

Furthermore, “ The payments made in purported connection with overseas image rights were in fact made in order to encourage Geovanni initially to enter into – and then to extend – his play-ing contract with Hull. In short, they were a reward for his services as a footballer and formed part of his earnings”. 62

This is landmark ruling that purports to show how the tax Tribunals will approach the ques-tion of whether payments made for use of image rights in fact constitute “earnings”3 of the play-er and therefore, subject to taxation. a “global” negotiation might suggest that an “image rights” payment was in fact part of an overall employment package and/or an inducement to extend a playing contract, parties would be well-advised to consider a contractual term for an image rights agreement which is not co-terminus with the length of the playing contract or contract of em-

Reg 80 Income Tax (Pay as You Earn) Regulations 200358

S.8 Social Security Contributions (Transfer of Functions) Act 199959

Para 11860

Para 53 (5)61

Para 10062

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ployment. A 12 month agreement, renewable only on satisfaction upon annual review that the agreement has been fruitful, is likely to be persuasive evidence that the payments, viewed realis-tically, were genuinely made in consideration for the right commercially to exploit a player’s image rights, and were not earnings. 63

5. Conclusions

The research question in this paper was how does employment status or receipt of grants impact on principles of international taxation of athletes. The basic premise that the taxation of sportspersons is often unfairly weighted in favour of local tax administrations and their proper structuring of their liability should minimise the local tax costs. The elimination or reduction of such costs as a result of the myriad of contracts that could be prepared breaking down the ser-vices capable of being provided into their component parts. The fact is that their levels of taxa-tion may often be higher than other individuals liability, and it is therefore a fundamental re-quirement when structuring contracts for entertainers and sportsmen that all of the relevant laws are clearly understood, and the difference between the residence and source is clearly arrived.

The OECD framework generally works on the basis that business income should be taxed in the individuals’ country of residence unless there is a fixed base of operations in the source country, subject to certain source rules on what may be called pure income profits. This is based on the argument that they would not be using local resources which have been funded by the state where they reside. By planning to limit taxation to the country of residence, the income of an entertainer or sportsman can be maximised and domestic concessions utilised, to provide long term financial benefits in what is often a short lived career.

However, the approach falls down if the individual can be considered tax resident in the country where he is performing, under local laws as clarified by double tax treaty provisions. In such circumstances, even if income is received initially with limited taxation, anti avoidance or other legislation may still be used to assess such income towards full local taxation based on the apportionment rules attributing that income to the resident individuals. This means that becom-ing a resident of such high tax countries, as the UK, can lead to the payment of a high tax return to the Inland Revenue.

It is therefore imperative to examine the tax structure applicable to the residence of the sportsperson where the individual is based during a period of absence from his home country. There is a need wherever possible to preserve double tax treaty protection against being consid-ered tax resident locally. This will ensure that the computation as to liability takes into account the residence and the source, and that the amount is proportionate to the athletes true liability.

Akash Nawbatt QC, Sebastian Purnell, Taxation of Image rights agreements –vital laws for football 63

clubs. 1 May 2019 https://www.lawinsport.com/.../taxation-of-image-rights-agreements-vital-lessons-for-football clubs.

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TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any

way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

[1] Exploitation of public fame or image in other professional circumstances is not covered by this draft Practical Compliance Guideline.

[2] The use or exploitation of copyright, trademarks or registered design rights would generally be speci-fically paid for by way of royalty or other payment.

[3] Section 18 of the CCA 2010 applies to a person, in trade or commerce engaging in conduct that is misleading and deceptive.

[4] See ATO Interpretative Decision ATO ID 2004/511 Income tax: Licence to use image granted to a family trust.

[5] Note: there may be capital gains tax consequences arising from the grant of a license for the use or exploitation of a sportsperson's 'public fame' or 'image'.

[6] See Taxation Ruling TR 1999/17 Income tax: sportspeople - receipts and other benefits obtained from involvement in sport.

Lawrence, Stephen and Bennett, Michael. Image rights in Australia: Fair game or foul ball? Taxation in Australia, Vol. 51, No. 9,

Apr 2017: 487.

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[7] See for example Brisbane Bears - Fitzroy Football Club Ltd v Commissioner of State Revenue [2016] QSC 231, 2016 ATC 20-584.

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